Natco Pharma Ltd., Hyd, Hyderabad V. DCIT, Cir-16(1), Hyderabad

ITA 319/HYD/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 59289 (ITAT-HYDERABAD)
• Duration Of Justice: 11 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-02-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 03-03-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K VASANTH KUMAR
• Assessee Lawyers: K MYTHILI RANI
• Keywords: Capital asset; Cost of acquisition; Capital receipt; Revised return; Capital expenditure
• Section: 143(3); 2(14); 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER I.T.A. NO. 765/HYD/2011 ASSESSMENT YEAR : 2007-08 DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-16(1) HYDERABAD VS M/S. NATCO PHARMA LTD. HYDERABAD AAACN6927A APPELLANT RESPONDENT I.T.A. NO. 319/HYD/2011 ASSESSMENT YEAR : 2007-08 M/S. NATCO PHARMA LTD. HYDERABAD AAACN6927A V S DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-16(1) HYDERABAD APPELLANT RESPONDENT REVENUE BY: SMT. K. MYTHILI RANI REVENUE BY: SHRI K. VASANTH KUMAR DATE OF HEARING: 19.01.2012 DATE OF PRONOUNCEMENT: 29.02.2012 ORDER PER CHANDRA POOJARI, A.M. THESE ARE CROSS APPEALS BY THE ASSESSEE AS WELL AS THE REVENUE DIRECTED AGAINST THE ORDER OF THE CIT(A)-V DATED 15.2.2011. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE C OMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE O F BULK DRUGS. FOR THE ASSESSMENT YEAR UNDER CONSIDERATION, THE AS SESSEE COMPANY FILED ITS RETURN OF INCOME ON 31.10.2007 AD MITTING A TOTAL INCOME AT RS.17,14,67,250/-. THEREAFTER, THE ASSE SSEE COMPANY FILED REVISED RETURN OF INCOME ON 20.11.2008 REVISI NG ITS TOTAL INCOME AT RS.12,52,93,840/-. THE BOOKS PROFIT UNDER SECTION I.T.A. NOS. 765 & 319/HYD/2011 M/S. NATCO PHARMA LIMITED. ========================= 2 115JB OF THE ACT WAS ADMITTED BY THE ASSESSEE COMPA NY AT RS.39.53,57,880/-. 3. THE ASSESSING OFFICER COMPLETED THE ASSESSMENT UNDE R SECTION 143(3) OF THE INCOME-TAX ACT, 1961 DETERMIN ING THE TOTAL INCOME OF THE ASSESSEE COMPANY AT RS.33,15,68,500/- . WHILE COMPLETING THE ASSESSMENT, THE ASSESSING OFFICER HE LD THAT RS.10 CRORES RECEIVED AS COMPENSATION FOR FOREGOING RIGHT TO ACQUIRE THE SHARES OF KRISHNAPATNAM PORT CO. LTD., [KPCL] AS SH ORT TERM CAPITAL GAIN INSTEAD OF ASSESSEES CLAIM THAT IT IS NOT TAXABLE SINCE THE COST OF ACQUISITION OF SUCH RIGHT IS TO BE TAKE N NOTIONALLY AS 'NIL'. THE ASSESSEE COMPANY ALSO CLAIMED THAT RIGHT TO ACQUIRE EQUITY SHARES IS NOT A CAPITAL ASSET AS PER SECTION 2(47) OF THE ACT AND COMPENSATION RECEIVED FOR WAIVER OF SUCH RIGHT IS A CAPITAL RECEIPT AND THE SAME IS NOT TAXABLE. THE OTHER ISS UE BEING RESTRICTING THE DEDUCTION UNDER SECTION 80IC OF TH E ACT TO RS.6,01,46,943/- AS AGAINST THE ASSESSEE COMPANY CL AIM OF RS. 20,66,45,736 BY REFERRING TO THE PROVISIONS OF SECT ION 80IA [8] OF THE ACT. THE ASSESSING OFFICER ALSO MADE AN ADDITIO N OF RS. 1,32,78,739/- INTEREST RECEIVABLE ON LOAN GIVEN TO NATCO ORGANICS LIMITED. 4. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER, TH E ASSESSEE PREFERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTH ORITY. AFTER ELABORATE DISCUSSION BY THE CIT [A], HE HELD THAT T HE RECEIPT OF RS.10 CRORES, HAS TO BE ASSESSED AS INCOME FROM OTH ER SOURCES AS PER HIS DISCUSSIONS IN PARA 5.5 TO 5.8 OF HIS ORDER . WITH REGARD TO THE RECALCULATION OF DEDUCTION UNDER SECTION 80IC O F THE ACT, HE CONFIRMED THE ACTION OF THE ASSESSING OFFICER AND W ITH REGARD TO THE ADDITION MADE BY THE ASSESSING OFFICE TOWARDS INTER EST, HE DELETED THE ADDITION. THUS, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED BY THE CIT [A]. AGGRIEVED FURTHER, BOTH THE ASSESSEE A ND DEPARTMENT ARE IN APPEAL BEFORE US. I.T.A. NOS. 765 & 319/HYD/2011 M/S. NATCO PHARMA LIMITED. ========================= 3 5. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT DURING THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR 2007-08, THE COMPANY RECEIVED RS.10 CRORES TOWARDS COMPENSATION FOR WAIVING THE RIGHT TO RECEIVE THE EQUITY SHARES WHICH WAS AD MITTED UNDER THE HEAD 'OTHER INCOME' IN THE PROFIT AND LOSS ACCO UNT. IN THE COMPUTATION OF INCOME THE ASSESSEE COMPANY CLAIMED THIS RECEIPT TO BE CAPITAL IN NATURE. THE ASSESSEE COMPANY PROMO TED KPCL FOR ESTABLISHING AND DEVELOPING A MINOR DEEP SEAPORT AT VILLAGE KRISHNAPATNAM IN NELLORE DISTRICT. IN ORDER TO IMPL EMENT THE PROJECT AND PENDING FINANCIAL CLOSURE, THE ASSESSEE COMPANY FINANCED CAPITAL EXPENDITURE AND ALSO DAY TO DAY RE VENUE EXPENDITURE OF THE PROMOTED COMPANY PURSUANT TO AGR EEMENT ENTERED INTO ON 9-6-1997. AS PER THE AGREEMENT, THE ASSESSEE COMPANY HAS A RIGHT TO CONVERT THE ADVANCES GIVEN I NTO EQUITY SHARES OF KPCL AT A MUTUALLY AGREED RATE. THE ASSES SEE COMPANY PROMOTED THE KPCL AND ENTERED INTO THE ABOVE AGREEM ENT WITH AN OBJECT TO IMPLEMENT THE PROJECT, ACQUIRE EQUITY STA KE AND DERIVE CAPITAL APPRECIATION IN THE LONG RUN. NO SEPARATE C ONSIDERATION HAS BEEN PAID FOR ACQUIRING THE RIGHT TO RECEIVE EQUITY SHARES. THE LOANS ADVANCED WERE TO BE CONVERTED INTO EQUITY SHA RES. THE ASSESSEE COMPANY RECEIVED RS.10 CRORES AS COMPENSAT ION TO WAIVE THE RIGHT TO CONVERT THE ADVANCES INTO EQUITY SHARE S. 6. IT IS SUBMITTED THAT THE COMPENSATION OF RS.10 CROR E RECEIVED FOR WAIVER OF RIGHT TO CONVERT ADVANCES IN TO EQUITY SHARES IS NOT A REVENUE RECEIPT. THE COMPENSATION AMOUNT H AS NO CHARACTER OF A REVENUE RECEIPT. THE ASSESSEE COMPAN Y IS NOT IN THE BUSINESS OF PROMOTING AND DISPOSING OFF COMPANIES. IF IT WAS SO, THE COMPENSATION RECEIVED WOULD HAVE BEEN A REVENUE RECEIPT. AS COULD BE SEEN FROM THE AGREEMENT THAT THE ASSESSEE COMPANY PROMOTED AND NURTURES THE COMPANY OVER A PERIOD OF TEN YEARS SPENDING SUBSTANTIAL FUNDS ONLY WITH A VIEW TO SUCC ESSFULLY IMPLEMENT THE PROJECT AND ACQUIRE SHARES AND REAP C APITAL I.T.A. NOS. 765 & 319/HYD/2011 M/S. NATCO PHARMA LIMITED. ========================= 4 APPRECIATION AND GAIN IN THE LONG RUN. BY RENOUNCIN G THE RIGHT TO CONVERT ITS ADVANCES INTO SHARE CAPITAL, THE ASSESS EE COMPANY HAS FORGONE THE CAPITAL APPRECIATION AND ALSO SOURCE OF RECURRING REVENUE BY WAY OF DIVIDENDS. THE LEARNED COUNSEL FO R THE ASSESSEE RELIED ON THE DECISION OF APEX COURT IN THE CASE OF OBEROI HOTELS PRIVATE LIMITED REPORTED IN 236 ITR 903 WHEREIN IT WAS HELD THAT COMPENSATION RECEIVED BY AN ASSESSEE FOR FOREGOING PRE-EMPTIVE RIGHT TO PURCHASE OR LEASE A PROPERTY WOULD BE IN T HE NATURE OF CAPITAL RECEIPT. HE ALSO RELIED ON THE DECISION OF APEX COURT IN THE CASE OF KETTLE WELL ELLEN AND CO. LTD. VS CIT. THE AMOUNT OF COMPENSATION OF RS. 10 CRORE HAS BEEN RECEIVED THRO UGH CHEQUE PURSUANT TO THE AGREEMENT DATED 18.04.2006. THE RIG HT TO ACQUIRE EQUITY SHARES IN KPCL WAS WAIVED FOR A CONSIDERATIO N OF RS. 10 CRORE AS PER CLAUSE 5 OF THE AGREEMENT REFERRED TO ABOVE. THEREFORE, THE LOWER AUTHORITIES ARE NOT CORRECT IN TREATING T HE SAME AS EITHER SHORT TERM CAPITAL GAIN OR INCOME FROM OTHER SOURCE S. 7. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESE NTATIVE RELIED ON THE ORDERS OF THE LOWER AUTHORITIES. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THE ASSE SSEE COMPANY ENTERED INTO AN AGREEMENT WITH KPCL ON 9 TH JUNE 1997 AS PER WHICH THE ASSESSEE WOULD ADVANCE FUNDS TO KPCL TO M EET ITS EXPENCES AND IN CONSIDERATION FOR HAVING MET ADVAN CED FUNDS, THE ASSESSEE WILL HAVE A RIGHT TO CONVERT ITS ADVANCES INTO EQUITY SHARES OF KPCL AT A RATE TO BE MUTUALLY BETWEEN TH ESE TWO PATIES. WE HAVE PERUSED THE SAID AGREEMENT AND WE FIND THAT BY VIRTUE OF THIS AGREEMENT ENTERED INTO WITH KPCL ON 9-6-1997, THE ASSESSEE COMPANY HAS A RIGHT TO CONVERT ITS ADVANCES INTO EQ UITY SHARES OF KPCL AT A PRICE TO BE MUTUALLY AGREED UPON. HOWEVER , THERE WAS A TRIPARTITE AGREEMENT ON 30-06-05 BETWEEN ASSESSEE , KPCL AND SHRI V.C NANNAPANENI BY WHICH THE PRESENT ASSESSEE AGREED TO I.T.A. NOS. 765 & 319/HYD/2011 M/S. NATCO PHARMA LIMITED. ========================= 5 WAIVE ITS RIGHT TO CONVERT THE ADVANCE MADE BY IT T O KPCL INTO EQUITY SHARES OF KPCL SUBJECT TO RECEIVING SUITABLE COMPENSATION. THE ASSESSEE THROUGH THIS TRIPRTITE AGREMENT HAS RE CEIVED RS. 26,19,72,872, WHICH IS REIMURSE OF ENITRE ADVANCE A ND ALSO RECEIVED RS. 11,60,82,000/- AS INTEREST ON MONEY AD VANCED TO KPCL WHICH WAS PAID BY MR.V.C. NANNAPANENI ON BEHAL F OF M/S KPCL. HOWEVER, THE ISSUE RELATING TO COMPENSATION P AYBLE TO ASSESSEE TO BE DECIDED ON MUTUALLY AGREEBALE TERMS, AT A LATER POINT OF TIME. THE COMPENSATION FOR WAIVER OF RIGH T TO CONVERT THE SHARES HAS BEEN AGREED UPON BY SHRI. NANNAPANENI AN D THE ASSESSEE COMPANY SEPARATELY VIDE AGREEMENT DATED 1 8-04-2006. AS PER THIS AGREEMENT DATED 18-04-2006, THE PAYMENT OF RS.10 CRORES, IS EXCLUSIVELY TOWARDS WAIVER OF ITS RIGHTS TO CONVERT THE ADVANCES MADE BY ASSESSEE TO KPCL INTO EQUITY SHARE S. WE ALSO FIND THAT THE FUNDING BY THE ASSESSEE COMPANY IN NA TCO IS PRIMARILY TO ACQUIRE THE SHARES IN RESPECT OF FUNDS ADVANCED. THEREFORE, THE TOTAL AMOUNT ADVANCED TO BE TREATED AS A CONSIDERATION FOR ACQUIRING THE SHARES IN KPCL. TH EREFORE, THE ADVANCES GIVEN TO KPCL DO FALL UNDER THE DEFINITION OF CAPITAL ASSET UNDER SECTION 2[47] OF THE ACT AS WE FIND THAT THE ASSESSEE COMPANY AGREED TO RECEIVE BACK ITS ADVANCES WITH IN TEREST AND IN ADDITION TO COMPENSATION FOR WAIVING THE ITS RIGHT CONVERT ADVANCE INTO SHARES. THE ASSESSEE COMPANY ADMITTED THAT IT HAD RECEIVED BACK THE ADVANCES AND INTEREST THEREON IN THE ASSES SMENT YEAR 2006-07 AND IT CANNOT TURN BACK AND TAKE A FRESH ST AND THAT THE COMPENASATION RECEIVED IS A CAPITAL RECEIPT. UNDER SECTION 2(14) OF THE INCOME TAX ACT 1961, A CAPITAL ASSET MEANS PROP ERTY OF ANY KIND HELD BY AN ASSESSEE, WHETHER OR NOT CONNECTED WITH HIS BUSINESS OR PROFESSION. THE WORD PROPERTY USED IN S 2(14) IS A WORD OF THE WIDEST AMPLITUDE AND THE DEFINITION HAS REEMPHASIZED THIS BY THE USE OF THE WORDS OF ANY KIND . ANY RIGHT WHICH CAN BE CALLED PROPERTY WILL BE INCLUDED IN THE DEFINITION OF CAPITAL ASSET . AN AGREEMENT FOR ALLOTMENT OF SALE IS CAPABLE OF SP ECIFIC I.T.A. NOS. 765 & 319/HYD/2011 M/S. NATCO PHARMA LIMITED. ========================= 6 PERFORMANCE. IT IS ALSO ENFORCEABLE. THEREFORE, A RIGHT ACQUIRED BY THE ASSESSEE TO CONVERT THE ADVANCE GIVEN TO KPCL INTO ALLOTMENT OF SHARES IS CLEARLY PROPERTY AS CONTEMPLATED BY SE CTION 2(14) OF THE ACT. THE MAIN CONTENTION OF LD. COUNSEL OF ASS ESSEE IS THAT EVEN IF THE RIGHT ACQUIRED BY THE ASSESSEE FOR AL LOTMENT SHARES CAN NOT BE CONSIDERED AS A PROPERTY WITHIN THE MEAN ING OF SECTION 2(14) STILL THERE WAS NO TRANSFER OF THAT PROPERTY BY THE ASSESSEE TO ATTRACT THE LIABILITY OF CAPITAL GAINS TAX. UNDER SECTION 45, THE LIABILITY IS ON ANY PROFITS OR GAINS ARISING FROM T HE TRANSFER OF CAPITAL ASSETS EFFECTED IN THE PREVIOUS YEAR. ACCO RDING TO THE LD.COUNSEL FOR THE ASSESSEE, THERE WAS NO TRANSFER OF PROPERTY EFFECTED IN THE PREVIOUS YEAR TO GIVE RISE TO CAPITAL GAIN LIABLE T O TAX UNDER THE ACT. SECTION 2(47) OF THE ACT GIVES A N INCLUSIVE DEFINITION OF THE CAPITAL GAINS AS UNDER: 2(47) TRANSFER IN RELATION TO A CAPITAL ASSET, INC LUDES: I) THE SALE, EXCHANGE OR RELINQUISHMENT OF THE ASSET; OR II) THE EXTINGUISHMENT OF ANY RIGHTS THEREIN; 9. IN THE PRESENT CASE, THE ASSESSEE GAVE UP ITS RIGHT TO GET ALLOTMENT OF SHARES OF KPCL AND THE RELINQUISHMENT OF AN ASSET IS A TRANSFER U/S 2(47). THERE WAS YET ANOTHER CONTENT ION RAISED BY THE LD. AR RELYING ON THE DECISION OF SUPREME COUR T IN THE CASE OF B.C. SREENIVASA SETTY (128 ITR 294) THAT WHAT IS C ONTEMPLATED BY SECTION 48(II) IS AN ASSET IN THE ACQUISITION OF WH ICH IT IS POSSIBLE TO ENVISAGE A COST AND THAT NONE OF THE PROVISION PER TAINING TO THE HEAD CAPITAL GAINS SUGGESTS THAT THEY INCLUDE AN ASSET IN THE ACQUISITION OF WHICH NO COST AT ALL CAN BE CONCEIVE D. HE ALSO RELIED ON THE JUDGEMENT OF SUPREME COURT IN THE CASE OF CI T VS. D.P. SANDU BROS., CHEMBUR PVT. LTD. & ORS. [273 ITR 1 (S C)]. IT WAS THE CONTENTION OF AR THAT, THERE WAS NO COST OF ACQUISI TION INCURRED BY THE ASSESSEE FOR OBTAINING THE RIGHTS UNDER THE AGREEMENT CITED EARLIER IN THIS ORDER AND SO THERE COULD BE NO CAP ITAL GAINS I.T.A. NOS. 765 & 319/HYD/2011 M/S. NATCO PHARMA LIMITED. ========================= 7 ASSESSABLE IN THAT CONNECTION. WE ARE NOT INCLINED TO AGREE WITH THE LD. COUNSEL THAT THERE WAS NO COST INCURRED BY THE ASSESSEE FOR ACQUIRING THE RIGHT TO GET THE ALLOTMENT OF SH ARES IN ITS FAVOUR. IT WAS NOT AS IF THE KPCL HAD UNILATERALLY BESTOWED ON THE ASSESSEE, THE RIGHT TO ALLOTMENT OF SHARES IN ITS FAVOUR. IT IS TO BE NOTED THAT AT THE TIME EXECUTION OF THE AGREEMENTS DATED 9 TH JUNE 1997 THE ASSESEE AND THEREAFTER ALSO ASSESEE A DVANCED MONEY TO KPCL TO THE TUNE OF RS.26,19,72,872/-. TH AT WAS A PAYMENTS MADE IN TERMS OF THE AGREEMENTS. IT WAS BY PAYING THIS SUM, THAT ASSESSEE ACQUIRED THE RIGHT TO GET ALLOT MENT OF SHARES IN ITS FAVOUR. WHEN THE ASSESSEE GAVE UP THAT RIGHT OR ASSIGNED IT IN FAVOUR OF MR. V.C. NANNAPANENI , THE ASSESSEE RECEI VED RS. 10 CRORES AND THIS AMOUNT IS LIABLE FOR CAPITAL GAIN T AXES. 10. AR RELIED ON FOLLOWING CASE LAWS: I) KALYANI EXPORTS & INVESTMENTS (P) LTD./JANNHAVI INVESTMENTS (P) LTD./RAJGAD TRADING (P) LTD. VS. DC IT (78 ITD 95) (PUNE) (TM) II) NALINIKANT AMBALAL MODY VS. S.A.L. NARAYAN ROW, CIT , BOMBAY CITY-I, 61 ITR 428 (SC) 11. THE DECISIONS RELIED UPON BY THE LEARNED COUNSEL FO R THE ASSESSEE DISTINGUISHABLE ON FACTS OF THE PRESENT CA SE. AFTER CONSIDERING THE TOTALITY OF FACTS AND CIRCUMSTANCES OF THE CASE, IN OUR CONSIDERED VIEW, THE ENTIRE AMOUNT OF RS.10 CRO RES RECEIVED BY THE ASSESSEE COMPANY TOWARDS COMPENSATION FOR WAIVE R OF RIGHTS TO RECEIVE THE SHARES OF KPCL IS TO BE BROUGHT TO T AX AS CAPITAL GAIN. THIS CAPITAL GAIN IS TO BE COMPUTED AS LONG T ERM OR SHORT TERM AS THE CASE BE ON PRORATE BASIS DEPENDING UPON THE INVESTMENTS/ADVANCES AS MADE BY ASSESSEE. AS WE HAV E HELD THAT THE ASSESEE IS LIABLE TO CAPITAL GAIN TAX ON THE RE LINQUISHMENT OF RIGHT TO ALLOTMENT OF SHARES, THE OTHER ARGUMENTS O F THE LD. AR CONTESTING THE ORDER OF CIT(A) THAT THE CIT(A) ERR ED IN SUSTAINING THE ADDITION OF RS. 10 CRORES AS INCOME FROM OTHER SOURCES HAS I.T.A. NOS. 765 & 319/HYD/2011 M/S. NATCO PHARMA LIMITED. ========================= 8 BECAME INFRACTUOUS AND DISMISSED ACCORDINGLY. SIMIL AR IS THE POSITION IN RESPECT OF GROUND NO. 3 OF REVENUE WHER EIN THE REVENUE HAS THE GRIEVANCE WITH REGARD TO TREATING T HE INCOME AS INCOME FROMOTHER SOURCES INSTEAD OF TREATING THE SA ME AS SHORT TERM CAPITAL GAIN. 12. THE GROUNDS RAISED BY THE ASSESSEE AS WELL AS REVEN UE ON THIS ISSUE ARE PARTLY ALLOWED. 13. NEXT ISSUE RELATES TO THE RESTRICTION OF DEDUCTION UNDER SECTION 80IC OF THE ACT TO RS.6,01,46,943/- AS AGAI NST RS. 20,66,45,736/-. THE FACTS ARE THAT THE ASSESSEE COM PANY HAS THREE UNITS I.E., AT MEKAGUDA, KOTHUR AND DEHRADUN. THE UNIT AT DEHRADUN WAS SET UP IN JUNE, 2006 AND DURING THE CU RRENT YEAR DEDUCTION UNDER SECTION 80IC WAS AVAILABLE. IN MEKA GUDA, BULK DRUGS AND ACTIVE PHARMACEUTICALS (APIS) ARE MANUFAC TURED WHEREAS IN KOTHUR AND DEHRADUN FINISHED DOSAGE OF PHARMACEUTICAL FORMULATIONS ARE MADE. THE ASSESSING OFFICER OBSERVED THAT THE TOTAL TURNOVER OF THE DEHRADUN UN IT WAS RS.25,66,45,736/- AND THE NET PROFIT WAS RS.20,82,3 6,882/-. THE NET PROFIT WORKED OUT TO 81.14% OF THE TURNOVER. FO R THE OTHER UNITS EXCLUDING DEHRADUN UNIT THE PROFIT WORKED OUT TO ONLY 6% OF THE TOTAL SALES. EVEN FOR THE KOTHUR UNIT WHERE EXA CTLY THE SAME OPERATIONS-WERE CARRIED OUT AS AT DEHRADUN, THE PRO FIT MARGIN WAS MUCH LESS AND AT MEKAGUDA, WHEREAS THE MAIN WORK WA S DONE, THERE WAS ACTUALLY A LOSS. ACCORDINGLY, THE ASSESSI NG OFFICER RECALCULATED THE PROFITS AND THE ELIGIBLE DEDUCTION S UNDER SECTION 80IC OF THE ACT. HE MADE A DETAILED WORKING AT PAGE S 12 AND 13 OF HIS ORDER AND FOUND THAT THE PROFITS OF DEHRADUN UN IT HAVE BEEN OVERSTATED OR INFLATED. HE HELD THAT THE AVERAGE G ROSS PROFIT RATIO OF MEKAGUDA AND DEHRADUN UNITS HAS TO BE ADOPTED FO R THE DEHRADUN UNIT ALSO FOR THE PURPOSE OF WORKING OUT E LIGIBLE DEDUCTION UNDER SECTION 80IC OF THE ACT. ON APPEAL, THE CIT [A] I.T.A. NOS. 765 & 319/HYD/2011 M/S. NATCO PHARMA LIMITED. ========================= 9 CONFIRMED THE ACTION OF THE ASSESSING OFFICER IN RE STRICTING THE DEDUCTION UNDER SECTION 80IC OF THE ACT. 14. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT AS PER THE PROVISIONS OF SECTION 80-IA(8) OF THE ACT WHICH ARE APPLICABLE IN VIEW OF PROVISIONS OF SECTION 80IC (7) OF THE AC T WHERE ANY GOODS OR SERVICES ARE TRANSFERRED FROM OTHER BUSINE SS TO ELIGIBLE BUSINESS, THE MARKET VALUE OF SUCH GOODS OR SERVICE S AS ON THE DATE OF TRANSFER ARE TO BE CONSIDERED FOR COMPUTATI ON OF INCOME. ONLY WHERE IN THE OPINION OF ASSESSING OFFICER THE COMPUTATION OF PROFITS AND GAINS OF THE ELIGIBLE BUSINESS IN THE M ANNER PRESCRIBED PRESENTS EXCEPTIONAL DIFFICULTIES THEN A REASONABLE BASIS MAY BE ADOPTED. WHEREAS IN THE CASE UNDER CONSIDERATION, THE ASSESSING OFFICER WITHOUT NARRATING AS TO WHAT EXACTLY IS THE EXCEPTIONAL DIFFICULTY IN COMPUTING THE PROFITS IN THE MANNER L AID DOWN IN THE PROVISION HAS RESORTED TO CLUBBING THE INCOMES OF T HE UNITS AT MEKAGUDA AND DEHRADUN AND RESORTED TO ARRIVE AT A P ROPORTIONS AT WHICH PROFITS OF ELIGIBLE BUSINESS COULD BE DERI VED. THE REASONS GIVEN OTHERWISE FOR SUCH A METHOD IS THAT THE ASSES SEE HAS INFLATED THE INCOME OF THE ELIGIBLE BUSINESS AND DEFLATING T HE INCOME OF NON ELIGIBLE UNIT. TO COME TO THIS CONCLUSION HE RELIED ON STATEMENTS RECORDED FROM TWO OF THE TECHNICIANS OF THE COMPANY WHO WERE PRODUCED BEFORE HIM ON HIS DIRECTION. IT IS SETTLE D PRINCIPLE OF LAW THAT WHENEVER A STATEMENT IS USED AGAINST SOMEBODY IT IS REQUIRED TO PROVIDE COPY OF SUCH STATEMENT AND ALLOW CROSS E XAMINATION. EVEN WHEN THE WITNESS IS THAT OF THE ASSESSEE ALSO, CROSS EXAMINATION NEEDS TO BE ALLOWED WHEN ADVERSE INFERE NCE IS DRAWN FROM SUCH STATEMENT. THE STATEMENT COULD NOT HAVE B EEN USED WITHOUT PROVIDING AN OPPORTUNITY TO THE ASSESSEE. T HEREFORE, IT IS SUBMITTED THAT THIS IS PURELY A SURMISE AND HAS NO BASIS. THE ELIGIBLE UNIT EARNS HIGHER INCOME SINCE THE PRODUCT S MARKETED ARE CANCER DRUGS AND THERE ARE VERY FEW SUCH DRUGS. IF THE ASSESSING OFFICER HAS TO ARRIVE AT SUCH CONCLUSION HE SHOULD HAVE COMPARED I.T.A. NOS. 765 & 319/HYD/2011 M/S. NATCO PHARMA LIMITED. ========================= 10 THE INCOME OF NON ELIGIBLE UNIT WITH ANOTHER COMPAR ABLE UNIT TO HOLD THAT THE INCOME IS DEFLATED BY CLAIMING EXCESS EXPENDITURE. HE SHOULD PROVE AS TO WHAT IS THE EXCESS EXPENDITUR E. PHARMACEUTICAL INDUSTRY AS SUCH IS AN INDUSTRY WHER E THE EXPENDITURE WILL BE VERY HIGH. WITHOUT ANY COMPARIS ON THE ASSESSING OFFICER BY JUST COMPARING WITH ELIGIBLE U NIT WITH NON ELIGIBLE UNIT CONCLUDED THAT THERE IS INFLATION OF INCOME AND DEFLATION OF INCOME. IT IS SUBMITTED THAT THIS IS C ONTRARY TO PROVISIONS OF LAW AND EVEN ON FACTS. 15. IT IS SUBMITTED THAT THE ASSESSING OFFICER AT BEST COULD HAVE ARRIVED AT THE MARKET VALUE OF THE GOODS TRANSFERRE D BY ADDING REASONABLE PERCENTAGE OF PROFIT OF THE UNIT THAT MA NUFACTURED THE SAME AND SHOULD NOT HAVE RESORTED TO CLUBBING AND A RRIVING AT THE ALLOWABLE DEDUCTION. IT IS PRAYED THAT THE ASSESSIN G OFFICER BE DIRECTED TO ARRIVE AT THE MARKET VALUE AND RE-COMPU TE THE PROFITS ELIGIBLE FOR DEDUCTION. FURTHER HE SUBMITTED THAT THE AO SHALL CONSIDER THE PRICE OF THE GOODS WHICH ORDINARILY FE TCH IN THE OPERN MARKET. FOR THIS PURPOSE HE RELIED ON THE ORDER OF THE TRIBUNAL IN THE CASE OF DCW VS. ADDL. CIT (37 SOT 322) (MUM). 16. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESE NTATIVE SUBMITTED THAT SUB-SECTION (8) IS APPLICABLE WHERE ANY GOODS HELD FOR ANY OTHER BUSINESS OF THE ASSESSEE ARE TRANSFER RED TO THE ELIGIBLE BUSINESS. IN THE CASE OF THE ASSESSEE, ACT IVE PHARMACEUTICAL INGREDIENTS (APIS) IN THE FORM OF IM ATINIB MESYLATE AND GEFTINIB FROM MEKAGUDA UNIT ARE TRANSFERRED TO DEHRADUN UNIT PURPORTEDLY AT COST. IN FACT, THEY CONSTITUTE THE MAIN RAW MATERIAL USED AT DEHRADUN FOR MANUFACTURE OF FINISH ED DOSAGE FORMULATIONS OF CAPSULES / TABLETS. IN FACT, THE TO TAL SALES TURNOVER OF THE DEHRADUN UNIT IN THE ABOVE FORMULATIONS IS RS.25,27,24,048/-. THE ENTIRE MATERIALS OF APIS ARE TRANSFERRED FROM MEKAGUDA UNIT. THE ASSESSEE CANNOT MARKET THE APIS I.T.A. NOS. 765 & 319/HYD/2011 M/S. NATCO PHARMA LIMITED. ========================= 11 PRODUCED AT MEKAGUDA BECAUSE OF US FDA RESTRICTIONS AND HAS TO CONVERT THEM INTO DOSAGE FORMULATIONS BEFORE SALE O F THE PRODUCTS. THUS, THE WHOLE ACTIVITY OF PRODUCTION OF APIS TO F ORMULATIONS IS TO BE TREATED AS AN INTEGRATED ACTIVITY OF THE ASSESSE E. IT IS THE API WHICH HAS BEEN AWARDED PATENT AND NOT THE FORMULATI ON. THEREFORE, THE VALUE ATTRIBUTABLE TO APIS SHOULD BE THE MAJOR COMPONENT OF FINAL VALUE OF THE FORMULATION. SINCE APIS HAVE NO COMPARABLE MARKET PRODUCTS OUTSIDE THEIR COMPANY, I TS UNIQUENESS AND KNOW-HOW GIVES IT THE VALUE IN THE M ARKET. IF IT IS A COMMONLY MANUFACTURED ITEM AVAILABLE WITH COMPETI TORS, THE VALUE OF API IS REDUCED SUBSTANTIALLY. THE MANUFACT URING PROCESS INVOLVED AT DEHRADUN IS RELATIVELY VERY SIMPLE IN T HAT, IT CONSISTS OF ONLY SIFTING, MIXING, DRYING, LUBRICATION, COMPRESS ION AND COATING OF THE PRODUCTS. THE VALUE OF PLANT AND MACHINERY I S ANOTHER INDICATOR OF THE EXTENT OF MANUFACTURING THAT TAKES PLACE AT DEHRADUN. THE TOTAL VALUE OF MACHINERY USED IS OF R S.57,03,202/-. IT IS APPARENT FROM THE DESCRIPTIONS OF THE MACHINE RY, THAT THE ACTIVITY RELATING TO VALUE ADDITION OF THE PRODUCT IS NEGLIGIBLE AT DEHRADUN AS THEY ARE MOSTLY USEFUL FOR BLENDING AND MIXING AND COMPRESSION INTO TABLETS AND FOR PACKING. THERE IS NO MUCH MANUFACTURING ACTIVITY INVOLVED IN THIS PROCESS. TH E TOTAL OF EXPENSES OTHER THAN RAW MATERIAL SHOWN AT DEHRADUN ARE RS.44,09,934/- WHICH IS NOT COMMENSURATE WITH THE S CALE OF OPERATIONS REQUIRED. THE ASSESSEE HIMSELF HAS PRODU CED TWO EXPERT STAFF WHO IN THEIR DEPOSITIONS STATED THAT THEY WER E GIVEN ANNUAL SALARIES TO THE TUNE OF RS.10 LAKHS IN TOTAL WHERE AS THE SALARIES DEBITED IN THE PROFIT AND LOSS ACCOUNT ARE ONLY RS. 1,09,036/-. IT IS ALSO STATED BY THEM THAT AT LEAST 20 TO 30 EMPLOYE ES WERE ENGAGED IN DEHRADUN. THE SALARIES GIVEN TO THE ABOVE PERSON S DO NOT FIND A PLACE IN THE PROFIT AND LOSS ACCOUNT OF DEHRADUN UN IT. THEREFORE, IT IS APPARENT THAT THE PROFITS OF DEHRADUN UNIT HA VE BEEN INFLATED PURPOSEFULLY. I.T.A. NOS. 765 & 319/HYD/2011 M/S. NATCO PHARMA LIMITED. ========================= 12 17. MOST OF THE RAW MATERIAL FOR THE DEHRADUN IS TRANSF ERRED FROM MEKAGUDA UNIT. FINAL PRODUCT IS BEING MANUFACTURED AT MEKAGUDA UNIT, WHEREAS, AT DEHRADUN UNIT CAPSULES ARE FILLED WITH THE DRUG. THE VALUE ADDITION IS NOMINAL AT DEHRADUN UNIT AND VIRTUALLY THE ENTIRE VALUE ADDITION TAKES PLACE AT MEKAGUDA UNIT. FOR THE PUR POSE OF ARRIVING AT DEDUCTION UNDER SECTION 80IC OF THE ACT, THE ELIGIB LE PROFITS SHOULD BE WORKED OUT BASING ON THE GROSS PROFIT RATIO AT MEKA GUDA UNIT. THEREFORE, THE LOWER AUTHORITIES CORRECTLY RESTRICTED DEDUCTIO N UNDER SECTION 80IC OF THE ACT OF RS.6,01,46,943/- AS AGAINST THE CLAIM OF THE ASSESSEE FOR A SUM OF RS.20,69,69,445/- 18. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS AVAILABLE ON RECORD. WE HAVE ALSO CONSIDE RED CAREFULLY THE FACTS AND CIRCUMSTANCES OF THIS CASE. WE FIND T HAT PROVISO TO SECTION 80IA (8) OF THE ACT CLEARLY EMPOWERS THE AS SESSING OFFICER TO RE-COMPUTE THE ELIGIBLE PROFITS ON A REASONABLE BAS IS AS HE DEEMS FIT. THE FACTS OF THE CASE ARE SELF-EVIDENT THAT IT IS UNTHINKABLE THAT THE DEHRADUN UNIT WOULD BE GIVING SUCH EXCEPTIONAL PROFITS WHILE THE MAIN UNIT AT MEKAGUDA IS SHOWING LESS. THE ASSE SSING OFFICER HAS POINTED OUT IN THE ASSESSMENT ORDER THAT THE AS SESSEE HAS CLEARLY DEFLATED SALARY EXPENSES, RAW MATERIAL EXPE NSES, ETC. WITH RESPECT TO DEHRADUN TO ARTIFICIALLY INFLATE THE PRO FIT. THE STATEMENTS RECORDED BY THE ASSESSING OFFICER FROM T WO EMPLOYEES OF THE ASSESSEE COMPANY CLEARLY SHOWS THAT EXPENSES HA D NOT BEEN BOOKED IN DEHRADUN BUT BOOKED IN OTHER UNITS TO ART IFICIALLY SHIFT PROFITS INTO DEHRADUN UNIT. ACCORDING TO THE ASSESS ING OFFICER THE FORMULATIONS IN MEKAGUDA UNIT CANNOT BE SOLD IN THE MARKET, IT IS OBVIOUSLY NOT PRACTICAL FOR HIM TO CALCULATE THE PR ICES OF INPUTS ON THE BASIS OF MARKET PRICES. IN OUR OPINION, IT IS MOST APPROPRIATE TO CONSIDER THE ACTUAL COST AS PER COST RECORDS MAI NTAINED BY THE ASSESEE AND THEREAFTER ASSESSING OFFICE CONSIDER T HE PROFITS ON THESE TRANSCTION AS COMPARED TO OTHER INDUSTRIES IN SIMILAR LINE OR IF THERE IS NO COMPARABLE, FIX REASONABLE PERCENTAG E OF PROFIT DEPENDING UPON MARKET CONDITION PREVAILING IN THE S IMILAR LINE OF I.T.A. NOS. 765 & 319/HYD/2011 M/S. NATCO PHARMA LIMITED. ========================= 13 INUDSTRY. ACCORDINGLY, WE SET ASIDE THIS ISSUE TO THE FILE OF ASSESSING OFFICE TO BRING THE COMPARABLE CASES ON R ECORD AND REDO THE ASSESSMENT ON THIS ISSUE. 19. THE MAIN GROUND RAISED BY THE REVENUE IS RELATES TO THE DELETION OF ADDITION OF RS.1,32,78,739/- BY THE CIT [A]. THE ASSESSEE COMPANY HAD ADVANCED CERTAIN LOANS TO M/S NATCO ORGANICS LIMITED IN THE EARLIER YEARS. SUCH ADVANCE S UP TO ASSESSMENT YEAR 2007-08 AMOUNTED TO RS.36,38,82,205 /-. THE ASSESSEE HAS NOT ADMITTED ANY INTEREST FOR THE ABOV E ADVANCE. IT WAS STATED THAT THE ADVANCE WAS GIVEN FOR BUSINESS PURPOSE OF THE ASSESSEE AND THAT THE ISSUE HAS BEEN DECIDED IN FAV OUR OF THE ASSESSEE BY THIS TRIBUANL. HOWEVER, THE TOTAL INTER EST OF RS.5,96,29,676/- IS STATED TO HAVE BEEN ADMITTED IN THE ASSESSMENT YEAR 2008-09. THE ASSESSEE OUGHT TO HAVE ADMITTED INTEREST OF RS.1,32,78,739/- PERTAINING TO THE CURR ENT ASSESSMENT YEAR WHICH WAS NOT DONE. THEREFORE, THE SAME IS BRO UGHT TO TAX AND ADDED BACK TO THE INCOME OF THE ASSESSEE - RS.1 ,32,78,739/- BY THE ASSESSING OFFICER. ON APPEAL, THE CIT [A] DE LETED ADDITION HOLDING THAT THE ASSESSING OFFICER DOES NOT HAVE AN Y REASONS OR BASIS TO SHOW THAT INTEREST HAD BEEN CHARGED BY THE ASSESSEE COMPANY FOR THE CURRENT YEAR AND HAD NOT BEEN DISCL OSED. HENCE, THE DEPARTMENT IS IN APPEAL BEFORE US. 20. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER MADE ADDITION OF RS.132.79 LAKHS AS INTEREST NOT ADMITTED ON THE AMOUNT, ADVANCED TO SISTER COMPANY NATCO. IT IS SUBMITTED THAT WHEN DISALLOWANCE OF INTEREST WAS MA DE BY THE ASSESSING OFFICER FOR EASRLIER ASSESSMENT YEAR, THI S TRIBUNAL HAS DELETED SUCH ADDITIONS HOLDING THAT THESE ADVANCES ARE FROM OWN FUNDS AND NOT FROM BORROWED FUNDS REQUIRING DISALLO WANCE. THE COMPANY ITSELF DURING THE FINANCIAL YEAR 2007-08 HA S DECIDED TO CHARGE INTEREST ON THESE ADVANCES AND ACCORDINGLY H AS ADMITTED I.T.A. NOS. 765 & 319/HYD/2011 M/S. NATCO PHARMA LIMITED. ========================= 14 SUCH INTEREST INCOME IN THE ASSESSMENT YEAR 2008-09 TO THE TUNE OF RS.596.30 LAKHS WHICH IS THE INTEREST FOR ALL TH E YEARS INCLUDING THE PRESENT ASSESSMENT YEAR. WHEN SUCH IS THE CASE, THE ASSESSING OFFICER IS OF THE OPINION THAT SUCH INTEREST RENTIN G TO THIS ASSESSMENT YEAR OUGHT TO HAVE BEEN ADMITTED AND ACC ORDINGLY HAS ADDED. IT IS SUBMITTED THAT THIS OPINION DOES NOT S TAND TO REASON AND ALSO IS NOT IN ACCORDANCE WITH THE PROVISIONS O F LAW. THEREFORE, IT IS PRAYED THAT THE ADDITION DELETED BY THE CIT[A ] IS TO BE CONFIRMED. ON THE OTHER HAND, THE LEARNED DEPARTMEN TAL REPRESENTATIVE RELIED ON THE ORDER OF THE ASSESSING OFFICER AND THE GROUNDS OF APPEAL. 21. WE HAVE EXAMINED CAREFULLY THE FACTS AND FIND THAT THE ADDITION MADE BY THE ASSESSING OFFICER DOES NOT HAV E ANY BASIS. THE ISSUE IS COVERED IN FAVOR OF THE ASSESSEE BY TH E DECISION OF THIS TRIBUNAL ON THE ASSESSEES OWN CASE IN THE EARLIER ASSESSMENT YEAR. MOREOVER, THE CIT [A] IS RIGHT IN OBSERVING THAT TH E ASSESSEE IS CORRECT IN SAYING THAT INTEREST HAS TO BE CHARGED F ROM THE DATE ON WHICH THERE IS A RESOLUTION OF THE BOARD OF THE COM PANY STATING THAT INTEREST HAS TO BE CHARGED. THE ASSESSING OFFI CER DOES NOT HAVE ANY REASONS OR BASIS TO SHOW THAT INTEREST HAD BEEN CHARGED BY THE ASSESSEE COMPANY FOR THE CURRENT YEAR AND HA D NOT BEEN DISCLOSED. ACCORDINGLY, WE DO NOT SEE ANY INFIRMITY IN THE ORDER OF THE FIRST APPELLATE AUTHORITY AND THE SAME IS CONFI RMED. THE GROUND RAISED BY THE REVENUE ON THIS ISSUE IS DISMI SSED. 22. IN THE RESULT, THE ASSESEE APPEAL AS WELL AS THE RE VENUE APPEAL ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH FEBRUARY, 2012. SD/- (ASHA VIJAYA RAGHAVAN) JUDICIAL MEMBER SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER DATED THE 29 TH FEBRUARY, 2012 I.T.A. NOS. 765 & 319/HYD/2011 M/S. NATCO PHARMA LIMITED. ========================= 15 COPY FORWARDED TO: 1. THE ACIT, CIRCLE-16(1), ROOM NO. 612, 6 TH FLOOR, AAYAKAR BHAVAN, BASHEERBAGH, HYDERABAD. 2. THE DCIT, CIRCLE-16(1), AAYAKAR BHAVAN, BASHEERBAGH , HYDERABAD. 3. M/S. NATCO PHARMA LTD., NATCO HOUSE, ROAD NO. 2, BA NJARA HILLS, HYDERABAD. 4. M/S. NATCO PHARMA LTD., C/O. M/S. A.V. RAGHU RAM & B. PEDDI RAJULU, ADVOCATES, 610, BABUKHAN ESTATES, BASHEERB AGH, HYDERABAD-500 004 5. THE CIT(A)-V, HYDERABAD. 6. THE CIT-IV, HYDERABAD. 7. THE DR, B BENCH, ITAT, HYDERABAD TPRAO